There’s been much tariff talk of late, but from an emerging markets equity perspective, what really matters are countries’ fundamentals and trade surpluses with the U.S. relative to their economies. Richard Farrell, EM Equity Portfolio Manager, looks at how key countries and regions are faring in the current environment.
Key takeaways
Emerging market countries are much more robust fundamentally than 10-15 years ago.
In aggregate, the EM current account and fiscal position are strong relative to the U.S..
Trade is increasing between EM countries, and there is limited exposure to U.S. trade.
EM countries are relatively well placed to deal with tariffs and trade restrictions.
Decoupling of EM trade
In terms of exports, the sensitivity of emerging markets (EM) to the U.S. and other developed markets (DM) has dropped considerably in recent years. A rise in intra-EM trade has resulted in over 45% of EM exports to other EM countries1. We believe this is a positive for the asset class over the long term as EM economies, particularly those that are more export-oriented, become less sensitive to DM consumption and increasingly driven by other EMs and their consumers.
Within the universe, however, there are nuances. Looking at foreign sales in relation to total sales, Taiwan and South Korea are most exposed to trade with the U.S., while countries that are more domestically focused, such as China, the Philippines, and Indonesia, are less sensitive to trade disruption.
China: A tech-driven recovery
China’s record trade surplus relative to the rest of the world has been driven by its emergence as the global leader in many new age technologies. Three industries in particular – electric vehicles, renewable energy, and high-end consumer electronics – have driven this significant increase in its overall trade balance.
That said, the main driver of China’s recent outperformance relative to other EM and global markets is the tech sector, and the fact that the country is less sensitive to exports than many investors would expect. Total exports are now 15% of GDP whilst exports to the US have fallen to 2.5%2. New economy stocks have rebounded over the last year, after a period of underperformance, and in Q1 this year, the market was relatively narrow, with performance driven by large tech stocks such as Alibaba and Tencent. This reflected the impact of the DeepSeek, which has reinforced the narrative around China's emerging AI industry.
Over the longer term, we believe that China is well placed to take advantage of these emerging technologies. Recent data shows that China is leading the way in the number of STEM graduates relative to other countries, as well as its percentage of graduates in STEM fields.
India: A recovering economic environment
Reforms under Modi’s government in the last ten years have set the country up for long-term economic and structural growth, particularly in terms of industrial infrastructure, and it’s a country where we see attractive investment opportunities.
A cyclical slowdown in growth meant that the market rally paused at the start of the year, however the economy is recovering and private sector CapEx is accelerating. This typically leads to consumption growth which, in turn, should positively impact certain companies.
In terms of the equity market, valuations continue to look expensive, however selectivity is key and there are certain sectors, such as financials, where exposure to long-term economic growth is on offer at a relatively more attractive valuation.
We believe India offers a particularly attractive opportunity within experiences consumption, and we will look to selectively add exposure as and when valuation opportunities arise.
Latin America: Potential for political sea change
Latin America has been a source of political and economic instability for many years, but an interesting development has been in Argentina in the last 12-18 months, under the new president, Milei. The Argentinian economy has undergone major reforms, with the budget now showing a surplus for the first time in over a decade. This has led to strong stock market performance, while more recently, the Argentinian peso successfully floated for the first time in many years.
There is hope from investors that these economic reforms will positively impact other countries in Latin America. An example is Brazil, where the incumbent president Lula’s approval rating has dropped in recent months. Next year’s election could result in a more pro-free market, pro-business president with an agenda to improve the country’s structural challenges.
Looking to Mexico, the country has benefited from the USMCA free trade agreement, and exports under the agreement are exempt from recent tariffs. We believe that with improvements to infrastructure, the rule of law, and the ease of doing business, Mexico could be a beneficiary of U.S. companies moving production closer to their own country and away from China. The country’s labour costs compared to countries such as Vietnam, China, and particularly the U.S., are very attractive.
Equity valuations across Latin America remain compelling and, whilst real interest rates remain very high across the region, a fall in inflation and a reduction in costs due to deregulation, as we have seen in Argentina, would enable central banks to cut rates. In turn, this will help credit growth drive infrastructure investment, which should result in higher productivity and thus higher structural growth over the long term.
The other benefit for Latin America is a weaker dollar. This would be a positive for emerging markets generally, but in terms of sensitivity, Latin America is the most positively exposed region.